A National Flood Insurance Primer

The catastrophic hurricane season of 2017 is forcing America to rebuild, and revealing shortfalls in a little-known, but important program. In 1965 the United States endured Hurricane Betsy, a Category 4 hurricane that hit hardest in Gulf Coast areas most prone to become inundated with water, such as the Lower Ninth Ward in New Orleans. Billion Dollar Betsy was one of the most expensive storms to ever hit the U.S. (at the time) with storm surge that destroyed buildings and infrastructure, and beached numerous ships along the Gulf Coast. The National Flood Insurance Act of 1968 was enacted in the wake of Hurricane Betsy and it established the National Flood Insurance Program (NFIP). The Johnson administration-era program was created in part due to the massive cost of rebuilding in the Gulf Coast, and to help alleviate the suffering of Americans living in flood zones around the country.

Today, NFIP is run by the Federal Emergency Management Agency (FEMA) and must be reauthorized by Congress every five years. The NFIP’s stated goal is to reduce the impact of flooding by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. FEMA insurance provided through the NFIP is different from FEMA assistance. FEMA assistance is meant for life-saving services and critical expenses, but it will not rebuild homes to their pre-disaster state. FEMA insurance, like that provided by the NFIP, will pay to rebuild homes regardless of whether or not there is a Presidential Disaster Declaration.

According to this Congressional Budget Office (CBO) report, published just one week after Hurricane Harvey touched down in Texas, the NFIP’s premiums fell short of expected costs this year, which is indicative of larger issues with the NFIP. CBO statistics show the median annual premium for residential coverage under an NFIP policy in effect on August 31, 2016, was $520. The central range of the payments for such policies was $420 to $1,330. As one might expect, these rates do not fully reflect the risk of billions of dollars of damage caused by increasingly frequent modern storms. This helps flood prone states such as Texas, Florida, and Louisiana to not face the true cost of floods. Coastal counties in these and other states constitute roughly 10 percent of all counties with NFIP policies, but account for three-quarters of all individual NFIP policies nationwide.

Nearly all flood insurance is underwritten by the NFIP. There is general agreement that the program’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses. As a result, the NFIP was over $23 billion in debt to the U.S. Treasury before the 2017 storms. Without comprehensive reform of the program FEMA will be unable to pay off this debt, according to the Government Accountability Office.

Congress has attempted to address these shortfalls before, with few of its changes persisting. For example, Pew writes that Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012. This legislation attempted to strengthen NFIP’s finances by phasing in insurance rate increases to account for actual risk for the most heavily subsidized, coastal county properties. However, two years later, the 2014 Homeowner Flood Insurance Affordability Act undermined the Biggert-Waters Act in three ways – it provided refunds to some policyholders who had incurred large premium increases, allowed subsidized rates to convey when properties are sold, and it capped rate increases for individual homeowners. The status quo and the persistent debt continued.

The NFIP was set to expire on September 30 this year, which suddenly made this situation more urgent. In anticipation of its expiration, Congress actively considered changes to the NFIP and the Trump administration’s contentious budget proposed eliminating part of the NFIP, which would have saved nearly $8.9 billion over ten years. Ironically, Hurricanes Harvey and Irma made landfall just before the expiration date, pushing the program to be reauthorized until December 8, 2017. This now leaves the door open for Congress to consider changes once again. The House already overwhelmingly passed a bill to forgive $16 billion worth of debt accrued by the NFIP, but it remains to be seen if permanent fixes to this federal program materialize.